Nonprofit Arts Orgs and the Boards That Love Them

Last week I read an article by Pablo Eisenberg in the Chronicle of Philanthropy in which he argues that greater oversight of nonprofits is needed because nonprofit boards can no longer be trusted to make sure the institutions they govern are serving the public interest, which they are legally obliged to serve. Eisenberg mentions hospitals and universities in particular, citing the recent debacles at University of Virginia and Penn State as evidence for why we can no longer put our faith in boards. However, I think it’s fair to say that the arts sector is not immune to “poor performance, corruption, and a lack of public accountability.”

Let me ask you: Do these seem to be reasonable questions to be asked of a nonprofit arts organization?

Why was the board unaware that the organization had been, for years, overspending? Who made the decision to spend funds that were restricted and on what were they spent? What is motivating what appears to be a radical shift in the programmatic strategy for the theater? How do you reconcile your mandate to be accessible with the fact that you are charging over $100 per ticket for this show? Why did you cancel the new play scheduled for this season and replace it with a revival? Can you explain why, over the past five years, administrative salaries and costs have grown at a faster rate than artistic salaries and costs? Do you think audiences may be declining because the quality of the programming has declined? Why did the board approve significant raises for the executive and artistic director even though the last three seasons have ended with deficits? Why are no female writers, or writers of color, featured in the upcoming season? Is it true that the work of a political artist was censored by your chief curator?

I think these are reasonable questions–difficult and complex to answer as they may be.

And yet, nonprofits often seem unable or unwilling to answer such questions directly, or they bristle at the idea that someone (a funder, a journalist, a new board member) would ask them in the first place. But one could argue that nonprofits shouldn’t need to be asked such questions at all–that they should be more transparent in the first place about the decisions they take, presumably in the public interest.

Which raises more questions: How seriously do nonprofit arts groups take their ‘public interest’ mandate? Do board members actually see themselves as representatives of the community’s interests (which they are)? Or rather do they consider themselves to be primarily advocates for the needs and goals of the institution?

Here’s Eisenberg on why boards cannot be trusted to look out for the public interest:

The reasons we can’t trust boards are most obvious at colleges and hospitals, which account for a large share of the assets of nonprofit institutions.

Most trustees at public universities and nonprofit hospitals are essentially political appointees, named by governors and state officials because of their political connections, as financial supporters, party members, or close allies to universities and the medical profession. The large majority are not experts in either health or education. Nor are they a cross section of their communities. They are among the wealthiest people in America, and they largely serve as lobbyists to attract more government aid to their institutions.

And at most colleges, public or private, it’s rare for boards to include students, professors, or members of the public in their boards, although some hospital boards include patients, nurses, and people who represent the community.

Also missing from the boards of most national and regional, and even community, groups are the blue-collar workers, teachers, small-business owners or grass-roots community leaders. It may be a cliché to say that we have become much more of a class society, but increasingly the nonprofit boards reflect that truth, and with it the problems of democratic representation and public accountability.

Instead, most trustees of large nonprofits mirror corporate America.

With the exception of the phrase about “political appointees” much of the same could be said of the boards of the largest arts organizations in the US.

Reflecting on Eisenberg’s article, I wonder:

Is this failure of nonprofits to look out for the public interest a new phenomenon? Or is it possible that boards and executives have always used nonprofits to achieve institutional rather than public aims? Put another way, is the problem with the nonprofit form itself (and the fact that it lends itself to manipulation) or with board members who have become, perhaps, more likely (for whatever reason) to use it to misguided ends? Or both, perhaps?

If a nonprofit fails to act in the public interest, what can the public reasonably do in response? If a community decided that a nonprofit was not well run what would its options be? A leveraged buy-out would clearly not be possible but is there an equivalent for nonprofits? And if not, why not, and do we need such a process?

Eisenberg’s suggestions for improving nonprofit oversight include: requiring all nonprofits with budgets over $5 million to appoint an inspector general or hire an ethics or compliance officer; appoint an independent ombudsman to investigate complaints by whistle-blowers; or appoint an oversight committee of citizens to communicate with boards about possible infractions.

The arc of the first five comments (each made by a different person) posted by readers in response to Eisenberg’s article made me chuckle:

“I’d like to be one of those new Ethics Officers. I would imagine that to be a $2m/year job, with the primary role being to not object to the Board’s or my own salaries.”

“No more regulators or regulations or layers of accountability.”

“Regulation on top of regulation is useless. As soon as one of Eisenberg’s ethics officers cheats or steals, we’ll need ethics officer overseers. Yes, some boards will be inept — so are some professors, and writers, and editors. Over-regulation solves nothing.”

“Sure…let’s pile bureaucracy on top of regulation on top of oversight on top of more bureaucracy. And while we’re at it, make sure we never, ever trust the private sector to govern itself. Typical academic clap-trap! I guess Eisenberg proves that when your only tool is a hammer (bureaucracy), then every problem looks like a nail. We already have more-than-sufficient regulation. Let’s start by simply enforcing the existing rules. The last thing we need is more government inserting itself into the situation.”

“I can’t help but think that the previous comments are not coming from people who provide the funds for the charities.”

Reading through the comments posted in response to his article, I noted that many people were skeptical of Eisenberg’s suggestions. Nonprofits are often offended or annoyed by the suggestion that greater oversight is needed, and assert that they are capable of self monitoring. But Eisenberg asserts that boards have proven over and over again that they are not.

In last week’s post I shared the Marshall W. Meyer and Lynne G. Zucker theory of permanently failing organizations: organizations that persist despite the fact that they are not achieving their goals. Arguably, permanently failing nonprofit organizations do not serve the public interest. But as the responses to Rocco Landesman’s 2011 supply/demand salvo showed, arts organizations seem to find it unacceptable that the NEA or the IRS or state arts agencies or any outside entity, really, would weigh in and mandate the closure of some organizations.

Thus, it seems that if permanently failing organizations are going to be encouraged to either take the necessary risks to become high performing, or acknowledge defeat and close their doors, board members are the ones that need to make that demand–on behalf of the public interest. Board members are in the driver’s seat when it comes to approving organizational plans, budgets, and (often) finding resources that allow an organization to persist.

Of course, if you were appointed to a board exclusively because of your ability to give or get money, or if you mistakenly believe your job is to keep the institution alive rather than on mission, or if you are reluctant to admit defeat “on your watch” … well, it’s easy to see why nonprofit board members may be prone to tolerate a permanently failing existence.

I’m not sure how to address the failure of nonprofit boards to, at times, do their jobs (and for the record I do not think all boards are failing in their responsibilities to the public); but it would seem that if the public is, indeed, losing trust in the ability of boards to act in their interest then we might very well expect increased calls for greater oversight to be imposed–for the ultimate good of the nonprofit and the public it serves.

Comments

well, the problem is intractable. All organizations become disconnected over time (e.g., see _Political Parties_ by Robert Michels, published in the 1910s) and as they become developed (_Social Psychology of Organizations_) their focus changes and become more siloed. Not to mention the general issues as laid out by Eisenberg concerning the composition of leadership.

I don’t think inspector generals are the way to go, even at $5MM, that’s not a whole lot of money in a budget to justify building a permanent bureaucracy, but you could build not sunset provisions, but regular review processes for nonprofits, as a part of their continued maintenance of their nonprofit status, maybe not unlike how “Civil Grand Juries” work in California–they review the functioning of various local government agencies and processes. Instead, set up a similar process to regularly review nonprofits.

Similarly, some cities have active auditors that do this kind of work and would be a model as well. Montreal and Seattle seem to be leaders in this, from what I’ve seen.

In DC, with the announcement by the Corcoran that it is considering leaving the city, I made the point that in Pennsylvania, the Attorney General’s office has taken a more prominent role in oversight of the management of certain nonprofits (e.g., the Hershey Trust, Girard Trust, Barnes Foundation-Lincoln University) because circumstances warranted it, and that the DC AG should step it up too.

Note that a related problem is that we don’t leverage the potential value of a network to reduce administrative and other burdens on small groups. E.g., DC has a system of local govt. representation called “Advisory Neighborhood Commissions.” There are 39. The city doesn’t help them find office space, set up and manage bank accounts, etc. So there is graft. But the city could provide financial administration and accounting services, although each would still have to have a treasurer, etc.

Let’s begin with a correction. Rocco Landesman did not argue for the NEA to “mandate the closure of some organizations.” As you must know, “mandate” is a strong word—it implies that some outside force, like government, will dictate which companies will go the way of the passenger pigeon. Landesman said the market—i.e., the forces of supply and demand, the fundamental tenets of an open economy—would organically observe a shrinkage of arts groups if the demand for their products and services didn’t grow. This is how we know—to paraphrase a famous line from All About Eve—that next to a tenor and a wardrobe woman, the leaders of nonprofit arts organizations are the touchiest things in show business.

Does Pablo Eisenberg no longer believe there is value in proper board recruitment, proper board training, proper methods of board engagement, proper board evaluation processes or any other baselines of board-related quality-control? If so, that’s a crying shame. I’m not suggesting that “proper” this and that can, in all cases, prevent boards from goofing off, checking out and blithely assenting to administrative indolence and fiscal stupidity. What a new layer of legal and administrative checks will achieve that the preexisting layer of legal and administrative checks will not, however, is unclear.

If, as Eisenberg states, most boards of large nonprofits mirror corporate America, that is because large nonprofits generally have large give or get requirements—and blue-collar Americans generally can’t give or get $50K or $100K a year or draw on $100M IRAs.

Certainly the current construct is not flawless. Most nonprofits, particularly in the arts, have probably half their boards serving for all the wrong reasons—because it’s a status symbol; because so-and-so knows so-and-so; because they confuse being a fan of the art with fighting to ensure its survival. But that is where my statement about “proper” standards comes in. Only when it’s supremely clear that a group cannot, try as they may, implement any or those “proper” ideas should an ombudsman be considered. And above all, he or she should not be paid for such a job.

The question, of course, is who that ombudsman might be. And that will lead to questions of proper ombudsman recruitment, proper ombudsman training, proper methods of ombudsman engagement, proper ombudsman evaluation processes and other questions of ombudsman-related quality-control. And then…what?

Dear Leonard – point taken (re: Rocco/mandate). I did not mean to imply that Rocco threatened to mandate the closure of organizations; but rather that, in response to the supply/demand conversation sparked by Rocco, many arts groups expressed aversion to the idea of outside forces determining which should live and which should die (I was thinking in particular about the references to NEA death panels and the like). But I agree with you … mandate was a poor word choice and my point may not have been well made. Tx for your thoughtful post.

I am curious if you have read Jerry Mander’s new book, “The Capitalism Papers.” in which he argues that the capitalist (market economy) system is killing the planet as it “is utterly dependent on never-ending economic growth on a finite planet with limited resources.” — in some ways reflecting what Landesman was seeing in the cultural landscape of our country. Could it be that the inability (rather than “failure”) of nonprofits to serve the public interest, and the increasing number of “permanently failing” nonprofit arts organizations may have more to do with the fact that these nonprofits are trying to exist in an essentially toxic environment? Do we need to look elsewhere for the fixes?

Diane, I could not agree more. The undoing of most arts organizations in South Florida — where I founded and then directed New Theatre in Coral Gables for 20 years — is largely caused by the ineptitude of their boards. Here’s an excerpt from a letter I sent to the editor of the Miami Herald a couple of weeks ago: “Since my arrival in South Florida and up until my departure for Cincinnati three years ago I saw much water run under the proverbial bridge and many arts organizations go under. A short list of those would include: The Ruth Foreman Theatre, The Jan McArt Theatre, The Brian C. Smith Theatre, Area Stage, Acme Acting Company, South of Broadway Theatre, the Coconut Grove Playhouse, Florida Stage and most recently, in the list of defunct or dying theatres, Boca Raton’s Caldwell Playhouse, now on receivership. To that list of theatres one may add Maximum Dance and Ballet Gammonet, among dance companies. The Coral Gables Art Museum at the Biltmore and the Cuban Museum are both gone. The Florida Philharmonic is no more. Am I leaving some others out? Probably.” I did leave out the Concert Association of South Florida, Ballet Florida and the Florida Shakespeare Festival. All of them victims of utterly incapable boards.

I am curious about this statement: “And yet, nonprofits often seem unable or unwilling to answer such questions directly, or they bristle at the idea that someone (a funder, a journalist, a new board member) would ask them in the first place.” Although you qualified this by writing nonprofits “often seem…”, it still reads as a rather broad brush. Can you please provide specific examples to support this assertion?

Dear Harold, it’s a fair question. I wasn’t thinking of specific organizations, per se, as I wrote each question but of a recurring experience I have had over the years. But below is an example of what I’m talking about. First is an excerpt from a 2010 article in the Seattle Times, written just as the Intiman Theatre in Seattle first began to show signs of life threatening financial challenges:

“In recent days, rumors have swirled over the financial stability of Intiman Theatre, a Tony Award winner and one of Seattle’s “Big Three” professional regional theaters. Those rumors only grew more persistent when the board president released a statement talking about recent “management missteps” and lapses in oversight that led to late payments to creditors. Intiman’s exact financial situation isn’t clear. Intiman leaders say “corrective measures” are being taken, that the theater is not in danger of closing and that this season and the next are proceeding as planned. But they won’t disclose, or may not even know, what the theater’s exact current financial situation is. Among the questions: How much of a deficit the theater recorded the last fiscal year, what its accumulated debt is, how much it owes to whom, why payments were missed, how much cash it has, and how much it’s drawn recently from its line of credit.

This much is known: Intiman recorded a $518,000 deficit in 2008-09, the most recent year for which Intiman’s tax records are available. It owes Seattle Center about $285,000 in back rent and utilities. It was late in paying some union dues; its endowment has fallen from $3.6 million about two years ago to about $1 million now; and it’s renegotiating its $1 million line of credit.”

Here’s an excerpt from an article in the Seattle Times written 6 months later:

“The financially beleaguered Intiman Theatre, a Tony Award winner and one of Seattle’s “Big Three” professional regional theaters, is canceling the rest of its season and laying off all its employees. […]

According to IRS filings, it ended each year from 2003 through 2009 in the red. By November 2010, it had an accumulated debt of $2.3 million. […] Intiman’s endowment had fallen from $3.6 million about two years ago to $1 million last fall. The endowment is now essentially at zero after using the money to secure, and then pay off, a $900,000 line of credit, said board president Bruce Bradburn. The theater has also not had an external audit of its finances in about 21 months because it changed the dates of its fiscal year, which threw the auditing schedule off. Such an audit will hopefully take place this year, Bradburn said.”

I am not intentionally picking on the Intiman (and for those who may be reading this but do not know, they are making valiant efforts to bring their organization back to life and producing a season this year). I sympathize with the fact that nonprofts have troubles like any business. I imagine they no more relish having to answer tough questions in the press than any other kind of business. And I recognize that some information may be protected from disclosure to the press. But when I read in November, “But they won’t disclose, or may not even know, what the theater’s exact current financial situation is”, and I see the list of questions that remain unanswered; and then I read in April the full scope of damage that has been uncovered, I find it troubling. Whether they didn’t know, or knew but wouldn’t tell, I believe it suggests both a lack of public accountability and a lack of sound governance.

The Intiman is not a singular example. My sense is that such responses are rather more common than not. But I welcome, as always, counter viewpoints. Thanks for your question.

I’m not sure if it answers my question, but thank you for your reply. I would only add that in my experience and observation, when an organization is under the most stress, and particularly when its existence is in question, it is generally not performing optimally. I do wonder, however, if your statement can be applied generally or, rather, perhaps more specifically to organizations under significant stress. I agree with you that no person or company likes to answer the tough questions, but an organization that is not functioning optimally may not handle such questions as deftly as a healthier organization. Perhaps, therefore, it would be more accurate to state that the way an organization responds to such questions may be symptomatic of other issues at play. I am just not sure that I can support your broad statement without more support for your argument. These are just my personal thoughts off the top of my head.

I would be curious to read your thoughts or recurring positive experiences with not-for-profits that you’ve observed, whether with regard to this or other areas. While it certainly is helpful to read about mistakes to avoid, perhaps it’s even moreso to learn about behavior to emulate. Thank you

Diane – thanks for this important post. I would argue that this is THE issue facing cultural organizations today, for with a board that keeps public interest in mind, an organization trying to adapt to changing community circumstances has a chance of adapting and continuing to serve. Without it, our efforts to change will be marginally successful at best. Looking forward to continuing this thread.

The hypocrisy of nonprofit organizations is there from the very start. A creative artist, for example, needs to create an organization to create work and receive funding because the IRS discourages direct support. The artist is then required to create a board that is supposed to think of “public interest” rather than that of the artist. Board members from business communities expect the organization to function like a corporation, rather than as a mechanism with which to create artwork. There is an inherent conflict. Eventually, the board may be forced to remove the artist as he is likely to be fiscally imprudent, and the board will most likely fail to sufficiently support his work.
The problem is that artist organizations are expected to behave like charities, which are a totally different animal. The problem is that nonprofits are pressured to make profits. The solution has to come from changes in government requirements and interference.

The funding model for arts organizations has become dramatically more elitist over the last couple of decades, as corporate, foundation, and government funding has eroded and major individual donor support has shifted from an 80 / 20 rule (80% of funds from 20% of donors) to 95 / 5, at best. Governing boards, not surprisingly, reflect these changes, and increasingly comprise a roll call of the community’s philanthropic elite. Not without cost: a board that is more diverse (economically as well as in ethnicity, age, etc.), that includes representatives of arts producers and arts consumers as well as arts funders, and that is at least somewhat independent of the status quo will ask complex questions that balance mission, market, community and artistic integrity. An elite, homogeneous, financially conservative board, by contrast, all too often asks no questions at all. Even the Intiman’s financial travails seem (as seen from afar, through the media lens) to result from the elitist notion that “we have the right people in the room, so everything must be fine.”

We stand ready to label an organization a failure if it doesn’t make payroll, chews through its endowment or ends each year in the red, but there are other kinds of failure, too. While obviously financial sustainability is important, I would suggest that by focusing on financial success–as defined by gift revenue–at all costs, we risk creating zombie organizations that, though they may live forever, have no heart (and no art!) And that is a problem no amount of external oversight or evaluation can fix.

I wasn’t going to share this with my Chair of the Board – for purely selfish professional reasons – but of course did and we had a great dfiscussion about the topic of Board responsibility and community leadership. Thank so much.

In my experience, it is not curators who censor artists’ work. Curators are most likely to propose it in the first place; most often that kind of behavior reflects board fears, conservativism or naked prejudice. Granted, the curator needs to articulate why an artist’s work needs to be seen and is consistent with the institutional mission and how it is responsive to the museum’s constituency and wider community. Board members should ask hard questions but must not impose personal views that may undermine institutional integrity and purpose. When that happens, other forms of oversight are pretty much beside the point.

What about instead of talking about closing or terminating nonprofits, we ease the way for organizations to become tax-paying businesses? Then jobs would be retained, productions still presented, history retained, etc. It seems like our fear of death & ending things overwhelms reason when it comes to keeping a specific organizational structure.

Businesses serve the public as well and could avoid the funder and IRS scrutiny by changing their incorporation status, right? As long as they don’t become publicly traded of course…

I’m curious how you imagine one could “ease the way for organizations to become tax-paying businesses” when we’re talking about theatres. I’ve never seen any figures, but observation would indicate that very few theatre or other arts organizations in the US are “tax-paying businesses.” No one I’ve heard of has ever come up with a solution to the built-in disproportion between the costs of making theatre (big) and the and the maximum revenue it can generate (small). Because, by definition, theatre is a live event unfolding in time, taking place in venues of finite capacity, the only way theatre can pay for itself is by charging Broadway prices for tickets, ($100-$300 the last time I checked) and even then, only if it’s a hit.

Underlying the problem of board governance is, I believe, a larger issue. The US, historically, has never had a culture of arts philantropy or patronage. I’ll go out on a limb here since I’m not a cultural historian and suggest that what we call “art” only flourishes in two sorts of societies: pre-industrial ones in which art activities are an integral part of the collective social and spiritual life, and those, like most in Europe, (wish I knew more about Asia in this regard) that have had centuries to become comfortable with the notion that meaningful (I.e. “great,” vital, relevant) art can’t exist without subsidy. Lewis Hyde, in his classic book, “The Gift,” contrasts transactions based on a market economy with those based on a gift economy. As you might imagine, he puts most art in the latter. Which is not the same as saying that artists should give their work away and all get day jobs. But it does speak to the inherent contradictions in asking theatre and similar forms to live or die according to their marketability.

Our society’s distrust of subsidizing the arts is one of the reasons that charities have been taken as the main model for all not-for-profit endeavors. That’s why board members, funders and politicians rarely allow art to be art, artists to be artists. To be worthy of support art must be educational, be good for business, improve the neighborhood, make us better citizens, end delinquency, etc, etc. Not that art can’t do these things. Not that there shouldn’t be arts in education, prisons, nursing homes and on the street. But how many such “outreach” projects are responses to what’s easiest to fund? As Carey Perloff wrote in an earlier thread: no one seems interested in funding a permanent acting company, not even at a successful resident theatre like ACT in San Francisco.

My point is that America’s form of non-profit arts organizations, including the board recruitment and expectations has been distorted by its fundamental, historical distrust of the arts. Though this becomes painfully clear whenever Congress haggles over the shamefully tiny amounts begrudged to the NEA, the distrust has always been there. It took the U.S. until the sixties to create the NEA, the closest we’ve come to a ministry of arts. We proudly remain one of the only advanced nations without cabinet level arts and culture departments. No wonder we’ve got problems.

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Diane Ragsdale

Diane is currently attending Erasmus University in Rotterdam (in the Netherlands), where she is researching the impact of economic forces on US nonprofit regional theaters since the 80′s and working towards a PhD in cultural economics. Read More…

Jumper

About 20 years ago, when I was in graduate school, I came across the following poem:
When an old pond
gets a new frog
it’s a new pond.
I think the inverse also may be true.
I’ve often been the new frog jumping into an old pond. Since 1988, I’ve worked in the arts in the US in various roles … [Read More...]

If you want a quicker read, then you may want to skip the speeches and opt for the article, "Recreating Fine Arts Institutions," which was published in the November 2009 Stanford Social Innovation Review.

Here is a recent essay commissioned by the Royal Society for the Encouragement of the Arts for the 2011 State of the Arts Conference in London, "Rethinking Cultural Philanthropy".

In 2012 I documented a meeting among commercial theater producers and nonprofit theater directors to discuss partnerships between the two sectors in the development of new theatrical work, which is published by HowlRound. You can get a copy of this report, "In the Intersection," on the HowlRound Website. Finally, last year I also had essays published in Doug Borwick's book, Building Communities Not Audiences and Theatre Bay Area's book (edited by Clay Lord), Counting New Beans.